Many people take home loans at high-interest rates because of poor credit history, but they can be eligible for lower rates when their credit profile gets better
A home loan can be a big relief for house purchase or construction. But as you go through the loan process, you might encounter terms that may not meet your expectations. On the positive side, though, banks also offer customers the option to choose the repayment period. However, transferring a home loan to a well-suited bank can help replace a high-cost loan with a cheaper one while simplifying the repayment process.
What Is Home Loan Balance Transfer
The home loan balance-transfer option empowers homeowners to shift their outstanding balance from their current lender to another, offering reduced interest rates or extended repayment periods. These borrowers can effectively cut their overall interest expenses by leveraging the low-interest rates facilitated by the balance transfer mechanism. This provision proves particularly advantageous for individuals who initially secured housing loans at elevated interest rates and now qualify for significantly lower rates owing to an enhanced credit standing.
The interest rates offered for transferring your home loan balance depend on how lenders view your credit history. They consider your credit score, age, job, and repayment ability. Usually, the interest rates for balance transfers are the same as regular home loan rates. But sometimes, some lenders offer different rates for balance transfers.
What Does The Home Loan Transfer Process Entail?
Going through the home loan transfer process involves steps designed to transition your home loan to a different financial institution smoothly.
Here's an overview of the procedure:
Initiate Application: To kickstart the home loan balance transfer, the first step is to notify your existing lender about your intent to transfer. This can be accomplished through a formal letter detailing your reasons for the transfer or by submitting the required application form specified by your bank.
Obtain No Objection Certificate (NOC) Or Consent Letter: Upon submitting your application, your original lender will furnish you with a crucial document known as the No Objection Certificate (NOC) or a consent letter. This document holds paramount importance as it is a prerequisite for initiating the transfer process with a new lender.
Document Submission: Armed with the NOC, you can proceed to furnish the necessary documentation to the prospective new lender. Alongside the NOC, you might require to provide
Know Your Customer (KYC) paperwork, property documents, loan balance statements, and interest records. Compliance with the bank's specified list of essential documents is also imperative.
Confirmation From Current Lender: Following the submission of documents, a waiting period ensues, during which you anticipate confirmation from your previous lender affirming the successful closure of the original loan.
Fee Payment: With confirmation in hand, you are poised to settle the requisite fees with the new lender, thus commencing a fresh loan agreement that aligns with your updated financial arrangement.
Benefits Of Home Loan Balance Transfer
Home refinancing involves paying off your existing home loan by taking off a new home loan with better terms, such as a lower interest rate. "The new loan can be taken either with the same or a new lender. With the old loan closed, the borrower can start payments on the new loan. A loan with friendlier payment terms will help the borrower increase long-term savings on interest. For example, a loan of Rs 50 lakh at eight per cent for 20 years attracts an interest of Rs 50.37 lakh. If this loan is refinanced at seven per cent, the interest falls to Rs 43.03 lakh, ensuring savings of nearly Rs 7 lakh, which can be used for savings, investments, and the achievement of various aspirations such as travel, vehicle upgrade, or higher education," says Adhil Shetty, CEO, BankBazaar.com, a financial services website.
Rate Differentiation
"Often, the biggest part of home ownership cost is the interest on the home loan. A loan cheaper by around 50 basis points (bps) or more could lead to shorter loan tenure, lower EMIs, lower interest payments, and large long-term savings. Anything less than 50 bps may not cover your costs of refinancing your loan, or the benefits may be too small to compensate for the efforts required," adds Shetty.
When Does A Balance Transfer Make Sense
Refinancing early in your loan tenure – typically in the first half – makes more sense. During this time, your EMIs focus mostly on interest payments. Therefore, a refinanced loan at a lower interest rate will lead to savings.
Costs Associated With Home Loan Balance Transfer
The most common associated costs are application and processing charges, and prepayment penalties, if any. In addition, some institutions may charge a commitment fee and, in the case of home loans, a mortgage deed fee and legal fee. All the fees you paid while getting your loan the first time would come into play. You pay foreclosure charges to your current lender when you finish your loan before the planned time. These charges are not there for loans with variable interest rates. But if you have a loan with a fixed interest rate, these fees could be as much as
four per cent of the money you still owe. You need to pay processing fees to the new lender when you apply for a new home loan (when transferring), which can be as much as six per cent of the loan amount.